FALCONSTOR SOFTWARE, INC. 2005 KEY EXECUTIVE SEVERANCE PROTECTION PLAN Effective as of December 1, 2005 As amended January 4, 2013 Exhibits Updated August 7, 2012 TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SECTION 1

ESTABLISHMENT OF PLAN

 

SECTION 2

DEFINITIONS

 

2.1

Base Salary

2.2

Board

2.3

Bonus Amount

2.4

Cause

2.5

Change in Control

2.6

Company

2.7

Effective Date

2.8

Employer

2.9

Executive Officer

2.10

Good Reason

2.11

Notice of Termination

2.12

Other Executives

2.13

Operating Companies

2.14

Participant

2.15

Permanent Disability

2.16

Plan

2.17

Severance Benefit

SECTION 3

ELIGIBILITY

 

3.1

Participation

3.2

Duration of Participation

SECTION 4

SEVERANCE BENEFITS

 

4.1

Right to Severance Benefit

4.2

Amount of Severance Benefit

4.3

Options

4.4

Restricted Stock

SECTION 5

TERMINATION OF EMPLOYMENT

 

5.1

Written Notice Required

5.2

Termination Date

SECTION 6

ADDITIONAL PAYMENTS BY THE COMPANY

 

6.1

Gross-Up Payment

 

 

6.2

Determination By Accountant

6.3

Notification Required

6.4

Repayment

6.5

Timing of Payment

SECTION 7

SUCCESSORS TO COMPANY

 

7.1

Successors

7.2

Sale of Operating Companies

SECTION 8

AMENDMENT AND PLAN TERMINATION

 

8.1

Amendment and Termination

8.2

Form of Amendment

SECTION 9

MISCELLANEOUS

 

9.1

Indemnification

9.2

Employment Status

9.3

No Duty of Mitigation

9.4

No Setoff

9.5

Benefits Under Other Plans

9.6

Validity and Severability

9.7

Governing Law; Choice of Forum

9.8

409A

 

APPENDIX I

APPENDIX II

 

 

 

WHEREAS, the Board of Directors of FalconStor Software, Inc., recognizes that the threat of a change in ownership or control of the Company may occur which can result in significant distractions of its key executive personnel because of the uncertainties inherent in such a situation; and

 

           WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its stockholders to retain the services of its key executive personnel in the event of a threat of a Change in Control of the Company and to ensure their continued dedication and efforts in such event without undue concern for their personal financial and employment security.

 

           NOW, THEREFORE, in order to fulfill the above purposes, the following plan has been developed and is hereby adopted.

 

 

           As of the Effective Date, the Company hereby establishes a severance compensation plan known as the FalconStor Software, Inc. 2005 Key Executive Severance Protection Plan as set forth in this document.

 

 

           As used herein the following words and phrases shall have the following respective meanings unless the context clearly indicates otherwise.

 

 

           As to any Participant the amount that the Participant is entitled to receive as wages or salary from his or her Employer on an annualized basis, as in effect immediately prior to a Change in Control or, if greater, at any time following the Change in Control.

 

 

           The Board of Directors of the Company.

 

 

           The term "Bonus Amount" shall mean for any Participant the highest annual bonus amount paid or payable to, or earned by, the Participant, whether or not taken or received by the Participant, in respect of any of the three (3) fiscal years of the Company preceding the Participant's termination of employment.

 

 

 

           “Cause” for termination by the Employer of the Participant’s employment shall mean (i) willful and continued failure by the Participant to substantially perform the Participant’s duties on behalf of the Employer (other than any such failure resulting from the Participant’s incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Participant) for a period of at least thirty consecutive days after a written demand for substantial performance has been delivered to the Participant by the Responsible Person, which demand specifically identifies the manner in which the Responsible Person believes that the Participant has not substantially performed the Participant’s duties, (ii) willful misconduct or gross negligence by the Participant which is demonstrably and materially injurious to the Company or any of its subsidiaries, or (iii) the Participant is convicted of, or has entered a plea of nolo contendere to, (x) a felony or (y) any crime (whether or not a felony) involving dishonesty, fraud, embezzlement or breach of trust.  For purposes of clauses (i) and (ii) of this definition, an act, or failure to act, on the Participant’s part shall not be deemed “willful” if done, or omitted to be done, by the Participant in good faith and with reasonable belief that the Participant’s act, or failure to act, was in the best interest of the Company.  In addition, as to any Participant who is an Executive Officer, the Participant shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant’s counsel, to be heard before the Board), finding in good faith that the Participant has committed Cause as set forth in such clauses and specifying the circumstances constituting Cause.  For purposes of this definition, “Responsible Person” shall mean (i) for a Participant who is an Executive Officer, the Board, and (ii) for a Participant who is an Other Executive, the Executive Officer to whom the Participant ultimately reports.

 

 

 

 

 

 

(i)           A merger, consolidation or reorganization (1) with or into the Company or (2) in which securities of the Company are issued (a “Merger”), unless such Merger is a “Non-Control Transaction.”  A “Non-Control Transaction” shall mean a Merger in which:

 

(A)           the stockholders of the Company immediately before such Merger own directly or indirectly immediately following such Merger at least fifty percent (50%) of the combined voting power of the outstanding voting securities of (x) the Surviving Corporation, if there is no Parent Corporation or (y) if there is one or more than one Parent Corporation, the ultimate Parent Corporation;

 

(B)           the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such Merger constitute at least a majority of the members of the board of directors of (x) the Surviving Corporation, if there is no Parent Corporation, or (y) if there is one or more than one Parent Corporation, the ultimate Parent Corporation; and

 

 

(C)           no Person other than (1) the Company, (2) any Related Entity, or (3) any employee benefit plan (or any trust forming a part thereof) that, immediately prior to the Merger, was maintained by the Company or any Related Entity, or (4) any Person who, immediately prior to the Merger had Beneficial Ownership of twenty percent (20%) or more of the then outstanding Shares or Voting Securities, has Beneficial Ownership, directly or indirectly, of twenty percent (20%) or more of the combined voting power of the outstanding voting securities or common stock of (x) the Surviving Corporation, if fifty percent (50%) or more of the combined voting power of the then outstanding voting securities of the Surviving Corporation is not Beneficially Owned, directly or indirectly by a Parent Corporation, or (y) if there is one or more than one Parent Corporation, the ultimate Parent Corporation;

 

(ii)          A complete liquidation or dissolution of the Company; or

 

(iii)         The sale or other disposition of all or substantially all of the assets of the Company and its subsidiaries taken as a whole to any Person (other than (x) a transfer to a Related Entity, (y) a transfer under conditions that would constitute a Non-Control Transaction, with the disposition of assets being regarded as a Merger for this purpose or (z) the distribution to the Company’s stockholders of the stock of a Related Entity or any other assets).

 

Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the “Subject Person”) acquired Beneficial Ownership of more than the permitted amount of the then outstanding Shares or Voting Securities as a result of the acquisition of Shares or Voting Securities by the Company which, by reducing the number of Shares or Voting Securities then outstanding, increases the proportional number of shares Beneficially Owned by the Subject Persons; provided, that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Shares or Voting Securities by the Company and, after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Shares or Voting Securities and such Beneficial Ownership increases the percentage of the then outstanding Shares or Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.

 

 

           “Company” shall mean FalconStor Software, Inc.

 

 

           The “Effective Date” of this Plan is December 1, 2005.

 

 

 

 

 

           All employees of the Company designated as “Officers” by the Board pursuant to Rule 16a1-f of the Securities and Exchange Commission and the Company’s General Counsel.

 

 

           “Good Reason” shall mean, as to any Participant, the occurrence of any of the following events or conditions following a Change in Control:

 

 

 

 

           “Notice of Termination” shall mean a notice which indicates the specific provisions in this Plan relied upon as the basis for any termination of employment and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant’s employment under the provision so indicated.  No purported termination of employment shall be effective without such Notice of Termination.

 

 

Such other employees of the Company who are so designated by a majority vote of all Independent Directors of the Company.  For purposes of this section, “Independent Directors” shall mean Directors who meet the independence requirements of the Nasdaq Stock Market Marketplace Rules at the time any action is taken.

 

 

           Subsidiary companies of the Company designated by the Company on Appendix I of the Plan.

 

 

           An employee of the Company who meets the eligibility requirements of Section 3.

 

 

           A Participant shall be deemed to have become permanently disabled for purposes of this Plan if the Chief Executive Officer of the Company (or, in the case of a determination with respect to the Chief Executive Officer, the Board) finds, upon the basis of medical evidence satisfactory to him or her, that the Participant is totally disabled, whether due to physical or mental condition, so as to be prevented from engaging in further employment by the Company and that such disability will be permanent and continuous during the remainder of his or her life.

 

 

 

 

           The benefits payable in accordance with Section 4 of the Plan.

 

 

 

 

           Executive Officers shall automatically become Participants in this Plan in Group III when designated Executive Officers by the Board.  Other Executives shall become Participants in the Plan if they are designated by the Board or Compensation Committee thereof as Participants.  Participants shall be identified on Appendix II of the Plan.  The Company shall amend Appendix II from time to time as necessary to include new Participants in the Plan or remove Participants from the Plan who are no longer eligible to participate in the Plan, in each case in accordance with the terms and conditions of the Plan.

 

 

           A Participant shall cease to be a Participant in the Plan if he or she ceases to be an Executive Officer of Other Executive at any time prior to a Change in Control (but subject to Section 4.1(b)) or if his or her employment is terminated following a Change in Control under circumstances where he or she is not entitled to a Severance Benefit under the terms of this Plan.  A Participant whose termination of employment entitles him or her to payment of Severance Benefits shall remain a Participant in the Plan until the full amount of the Severance Benefits have been paid to him or her.

 

 

 

 

           If a Participant’s employment is terminated in circumstances entitling him or her to a Severance Benefit as provided in Section 4.1, such Participant shall be entitled to the following benefits:

 

 

 

 

                      (b)           for the period of months, as specified for each Participant Designation Level in the table below, subsequent to the Participant’s termination of employment, the Company shall at its expense continue on behalf of the Participant and his or her dependents and beneficiaries, the basic life insurance, flexible spending account, medical and dental benefits which were being provided to the Participant immediately prior to the Change in Control (or, if greater, at any time thereafter).  The benefits provided in this Subsection 4.2(b) shall be no less favorable to the Participant, in terms of amounts and deductibles and costs to him or her, than the coverage provided the Participant under the plans providing such benefits at the time Notice of Termination is given.  The Company’s obligation hereunder to provide the foregoing benefits shall terminate to the extent the Participant obtains replacement coverage under a subsequent employer’s benefit plans at an equal or higher level.  The amount of the foregoing benefits and reimbursements provided in a Participant’s taxable year cannot affect the amounts provided in any other taxable year.  To the extent the foregoing requires reimbursements be paid to a Participant, the reimbursement must be made on or before the last day of the Participant’s taxable year following the taxable year in which the expense was incurred.  The Company also shall pay a lump sum equal to the amount of any additional income tax payable by the Participant and attributable to the benefits provided under this subparagraph (b) at the earlier of (i) the time such tax is imposed upon the Participant and (ii) the end of the Participant’s taxable year next following the taxable year in which the Participant remits the taxes;

 

 

 

 

 

 

 

 

 

 

(a)           If the Participant’s employment is terminated by the Company for Cause or due to Permanent Disability, the date specified in the Notice of Termination shall be at least thirty (30) days from the date the Notice of Termination is given to the Participant, provided that in the case of Permanent Disability the Participant shall not have returned to the full-time performance of his or her duties during such period of at least thirty (30) days; and

 

(b)           If the Participant terminates his or her employment for Good Reason, the date specified in the Notice of Termination shall not be more than sixty (60) days from the date the Notice of Termination is given to the Company.

 

 

 

 

 

 

 

           All determinations required to be made under this Section 6, including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by the independent accounting firm retained by the Company on the date of Change in Control (the “Accounting Firm”), which shall provide detailed supporting calculations both to the Company and the Participant within 15 business days of the date of termination, if applicable, or such earlier time as is requested by the Company.  If the Accounting Firm determines that no Excise Tax is payable by the Participant, it shall furnish the Participant with an opinion that he or she has substantial authority not to report any Excise Tax on his or her federal income tax return.  Any determination by the Accounting Firm shall be binding upon the Company and the Participant.  As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up payments which will not have been made by the Company should have been made (“Underpayment”), consistent with the calculations required to be made hereunder.  In the event that the Company exhausts its remedies pursuant to Section 6.3 and the Participant thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Participant.

 

 

 

           The Participant shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment.  Such notification shall be given as soon as practicable but no later than ten (10) business days after the Participant knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid.  The Participant shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due).  If the Company notifies the Participant in writing prior to the expiration of such period that it desires to contest such claim, the Participant shall:

 

 

           If, after the receipt by the Participant of an amount advanced by the Company pursuant to Section 6.3, the Participant becomes entitled to receive any refund with respect to such claim, the Participant shall (subject to the Company’s complying with the requirements of Section 6.3) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto).  If, after the receipt by the Participant of an amount advanced by the Company pursuant to Section 6.3, a determination is made that the Participant shall not be entitled to any refund with respect to such claim and the Company does not notify the Participant in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof the amount of Gross-Up Payment required to be paid.

 

 

All amounts owing under Section 6.1 shall be made no later than the end of the Participant’s taxable year next following the Participant’s taxable year in which the Excise Tax, or taxes imposed on the Gross-Up Payment, as applicable, is remitted.

 

 

 

This Plan shall bind any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, in the same manner and to the same extent that the Company would be obligated under this Plan if no succession had taken place.  In the case of any transaction in which a successor would not by the foregoing provision or by operation of law be bound by this Plan, the Company shall require such successor expressly and unconditionally to assume and agree to perform the Company’s obligations under this Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.

 

 

 

If a Participant’s employment with his or her Employer terminates in connection with the sale, divestiture or other disposition of the stock or assets of any Operating Company (or part thereof) (a “Transaction”) after the execution of an agreement providing for a transaction or transactions which, if consummated, would constitute a Change in Control or after a Change in Control, such termination shall not be a termination of employment of the Participant for purposes of the Plan, and (notwithstanding the rights provided to the Participant by Section 4.1(a)) the Participant shall not be entitled to a Severance Benefit as a result of such termination of employment if (i) the Participant is offered continued employment, or continues in employment, with the divested Operating Company (or part thereof) or the purchaser of the stock or assets of the Operating Company (or part thereof), as the case may be, or one of their respective affiliates (the “Post-Transaction Employer”) on terms and conditions that would not constitute Good Reason and (ii) the Company obtains an agreement from the acquiror of the stock or assets of the divested Operating Company (or part thereof), enforceable by the Participant, to provide or cause the Post-Transaction Employer to provide severance pay and benefits, if the Participant accepts the offered employment or continues in employment with the Post-Transaction Employer or its affiliates following the Transaction, (A) at least equal to the Severance Benefit and (B) payable upon a termination of the Participant’s employment with the Post-Transaction Employer and its affiliates within the period described in Section 4.1(a)(ii) (or such part of it as is then remaining) for any reason other than Cause, Permanent Disability, the Participant’s death or a termination by the Participant without Good Reason.  For purposes of this Section 7.2, the terms Cause, Good Reason and Permanent Disability shall have the meanings ascribed to them in Sections 2.4, 2.10 and 2.15 respectively, but the term Employer as it is used in those Sections shall be deemed to refer to the entity employing the Participant after the Transaction, the term Company shall mean such employer or, if there is an ultimate parent corporation of such employer, such ultimate parent corporation, and the terms Board and Chief Executive Officer as used in those Sections shall be deemed to refer to the individuals or bodies serving those functions for such employer or, if applicable, such ultimate parent corporation.

 

 

 

Prior to a Change in Control, the Plan may be amended or modified in any respect, and may be terminated, in any such case, by resolution adopted by two-thirds of the Board; provided, however, that no such amendment, modification or termination which would adversely affect the benefits or protections hereunder of any individual who is a Participant as of the date such amendment, modification or termination is adopted shall be effective as it relates to such individual unless no Change in Control occurs within one year after such adoption, any such attempted amendment, modification or termination adopted within one year prior to a Change in Control being null and void ab initio as it relates to all such individuals who were Participants prior to such adoption (it being understood that the removal of Participants from participation in the Plan shall, for purposes of this proviso, constitute an adverse action for the Participants so removed); provided, further, however, that the Plan may not be amended, modified or terminated, (i) at the request of a third party who has indicated an intention or taken steps to effect a Change in Control and who effectuates a Change in Control or (ii) otherwise in connection with, or in anticipation of, a Change in Control which actually occurs, any such attempted amendment, modification or termination being null and void ab initio.  Any action taken to amend, modify or terminate the Plan which is taken after the execution of an agreement providing for a transaction or transactions which, if consummated, would constitute a Change in Control shall conclusively be presumed to have been taken in connection with a Change in Control.  From and after the occurrence of a Change in Control, the Plan may not be amended or modified in any manner that would in any way adversely affect the benefits or protections provided hereunder to any individual who is a Participant in the Plan on the date the Change in Control occurs.

 

 

 

           The form of any amendment or termination of the Plan shall be a written instrument signed by a duly authorized officer or officers of the Company, certifying that the amendment or termination has been approved by the Board.

 

 

 

The Company shall pay as they become due all legal fees, costs of litigation and other expenses incurred in good faith by any Participant as a result of the Company's refusal or failure to provide the Severance Benefits to which the Participant becomes entitled under this Agreement, as a result of the Company's contesting the validity, enforceability or interpretation of this Agreement or the Participant’s right to Severance Benefits hereunder.  The Participant shall be conclusively presumed to have acted in good faith unless a court makes a final determination not otherwise subject to appeal to the contrary.

 

 

This Plan does not constitute a contract of employment or impose on any Employer any obligation to retain the Participant as an employee, to change the status of the Participant’s employment as an Executive Officer or an Other Executive, or to change any employment policies of any Employer.  Without limiting the generality of the immediately preceding sentence, the Employer of a Participant may terminate the employment of the Participant at any time following a Change in Control, with or without Cause, subject to Section 5 hereof.

 

 

 

The Company acknowledges that it would be very difficult and generally impracticable to determine a Participant’s ability to, or the extent to which a Participant may, mitigate any damages or injuries the Participant may incur by reason of the Change of Control. The Company has taken this into account in adopting this Plan and, accordingly, the Company acknowledges and agrees that no Participant shall have any duty to mitigate any such damages and that the Participant shall be entitled to receive all  Severance Benefits regardless of any income which the Participant may receive from other sources following any Change of Control.

 

 

The Company's obligation to give Severance Benefits to a Participant pursuant to this Plan and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, but not limited to, any setoff, counterclaim, recoupment, defense or other right which the Company may have against a Participant.

 

 

The benefits that a Participant may be entitled to receive pursuant to Section 4.2 of this Plan are not intended to be duplicative of any similar benefits to which the Participant may be entitled from the Company under any other severance plan, agreement, policy or program maintained by the Company or any of its Subsidiaries. Accordingly, the benefits to which a Participant is entitled under Section 4.2 shall be reduced to take account of any other similar benefits to which the Participant is entitled from the Company; provided, however, that if the amount of benefits to which the Participant is entitled under such other severance plan, agreement, policy or program is greater than the benefits to which the Participant is entitled under Section 4.2 of this Plan,  the Participant will be entitled to receive the full amount of the benefits to which the Participant is entitled under such other plan, agreement, policy or program.

 

 

           The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability of any other provision of the Plan, which shall remain in full force and effect, and any prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

 

 

The validity, interpretation, construction and performance of the Plan shall in all respects be governed by the laws of the State of New York.  A Participant shall be entitled to enforce the provisions of this Plan in any state or federal court located in the State of New York, in addition to any other appropriate forum.

 

 

 

If at the time a Participant’s employment is terminated the Participant is a “specified employee” within the meaning of Section 409A of the Code and the regulations thereunder, to the extent required to comply with Section 409A, payment of the Severance Benefits shall not commence until one day after the day which is six months following the Termination Date, with the first payment equaling the full amount of such Severance Benefits.

 

IN WITNESS WHEREOF, the Company has caused the Plan to be effective as of the Effective Date.

	FALCONSTOR SOFTWARE, INC.
	By	/s/ Rei Jane Huai
	Title:	Chairman

 

ATTEST:
By	/s/ Seth Horowitz
Title:	Corporate Secretary